China’s latest policy easing unlikely to stem property sector decline as it seeks to boost growth

SINGAPORE (ICIS)–The People’s Bank of China (PBOC)’s latest move to cut the country’s financial institutions’ reserve requirement ratio (RRR) is likely to be insufficient to tackle the ongoing decline in the local property sector and poor market confidence.

The central bank on 24 January announced that the RRR will be cut by 50 basis points (bps) from 5 February. The PBOC also said there will be room for further monetary policy easing.

The RRR reduction was in line with expectations, given China’s economic challenges and ahead of the Lunar New Year when liquidity typically tightens.

Lowering the mandatory reserve ratios for banks will enhance their ability to offer more loans, thereby boosting expenditure across the wider economic landscape.

The magnitude of cuts was larger than recent ones and the biggest since early 2022.

After this reduction, the weighted average deposit reserve ratio of financial institutions will be lowered to around 7.0% from 7.4%.

“We think this larger-than-expected RRR cut is a further sign that the PBOC and top policymakers have become increasingly concerned about the ongoing economic dip,” Japan’s Nomura Global Markets Research said in a note.

“The latest move could help market sentiment to a certain extent, but we doubt the 50bps RRR cut alone could really have an effective impact on growth.”

The world’s second-largest economy grew by 5.2% in 2023, broadly in line with official projections. Its fourth-quarter GDP growth stood at 5.2%.

On 15 January, the PBoC opted not to cut policy rates, defying market expectations. On 25 January, the country’s loan prime rates (LPRs) were left unchanged.

The RRR cut is expected to release CNY1 trillion of long-term liquidity in the banking system, which is targeted to boost lending and ensure banks have sufficient liquidity to support larger government bonds issuance ahead.

However, as with the cuts to interest rates and RRR last year, the recent easing measures are “likely inadequate to address the current weak market confidence and the continuing downturn in the domestic real estate market,” said Ho Woei Chen, an economist at Singapore-based UOB Global Economics & Markets Research.

The troubles in China’s property sector have directly impacted demand for petrochemical products, which are essential components in construction and manufacturing.

Products such as phthalic anhydride (PA) or n-butanol used in paints and coatings are directly affected due to their application in real estate development.

“Maintaining policy consistency and more monetary/fiscal support to follow through the government’s pledge to stabilise outlook will be crucial ahead,” Ho said.

“We think that there remains room for a further reduction to banks’ RRR in Q2 or Q3, but that will become more limited given the PBOC’s floor at 5.0%.”

In addition, the PBOC will lower the interest rates of relending and rediscount supporting agriculture and small firms by 25 bps to 1.75%.

There are likely to be more support measures in the pipeline heading into the National People’s Congress (NPC) in early March, when the key economic targets including the growth target for 2024 will be announced, according to UOB’s Ho.

The government was recently reported to be planning a CNY2tr ($278bn) market stabilization fund, which is equivalent to 1.6% of its GDP.

Focus article by Nurluqman Suratman